Jatiya Kabi Kazi Nazrul Islam University Trishal, Mymensingh Course Name: Financial Markets & Institutions Course Code: FB 309 Topic of The Assignment: Overall Structure of Commercial Banks Submitted To Md. Masud Chowdhury Assistant Professor Dept. of Finance & Banking J.K.K.N.I.U. Submitted By Rafi Md. Afnan Azad ID: 16132604 Session: 2015-16 Dept. of Finance & Banking J.K.K.N.I.U. Date of Submission: 10th September, 2018 Commercial Bank A commercial bank is an institution that provides services such as accepting deposits, providing business loans, and offering basic investment products. The main function of commercial bank is to accept deposit from the public for the purpose of lending money to the borrowers. Commercial bank can also refer to a bank, or a division of a large bank, which more specifically deals with deposit and loan services provided to corporations or large/middle-sized business - as opposed to individual members of the public/small business. History The history of banking began with the first prototype banks which were the merchants of the world, who made grain loans to farmers and traders who carried goods between cities. This was around 2000 BC in Assyria, India and Sumeria. Later, in ancient Greece and during the Roman Empire, lenders based in temples made loans, while accepting deposits and performing the change of money. Archaeology from this period in ancient China and India also shows evidence of money lending . Many histories position the crucial historical development of a banking system to medieval and Renaissance Italy and particularly the affluent cities of Florence, Venice and Genoa. The Bardi and Peruzzi Families dominated banking in 14th century Florence, establishing branches in many other parts of Europe. The most famous Italian bank was the Medici bank, established by Giovanni Medici in 1397. The oldest bank still in existence is Banca Monte dei Paschi di Siena, headquartered in Siena, Italy, which has been operating continuously since 1472. The development of banking spread from northern Italy throughout the Holy Roman Empire, and in the 15th and 16th century to northern Europe. This was followed by a number of important innovations that took place in Amsterdam during the Dutch Republic in the 17th century, and in London since the 18th century. During the 20th century, developments in telecommunications and computing caused major changes to banks' operations and let banks dramatically increase in size and geographic spread. The financial crisis of 2007–2008caused many bank failures, including some of the world's largest banks, and provoked much debate about bank regulation. Primary Functions Commercial banks accept various types of deposits from public especially from its clients, including saving account deposits, recurring account deposits, and fixed deposits. Commercial banks provide loans and advances of various forms, including an overdraft facility, cash credit, bill discounting, money at call etc. Commercial banks introduce different investment programes for people of all income levels. Other Functions Along with core products and services, commercial banks perform several secondary functions. The secondary functions of commercial banks can be divided into agency functions and utility functions. Agency Functions Include: To collect and clear cheques, dividends and interest warrant To make payments of rent, insurance premium, etc. To deal in foreign exchange transactions To purchase and sell securities To act as trustee, attorney, correspondent and executor To accept tax proceeds and tax returns. Utility Functions Include: To provide safety locker facility to customers To provide money transfer facility To issue traveller's cheque To accept various bills for payment: phone bills, gas bills, water bills, etc. To provide various cards: credit cards, debit cards, smart cards, etc. Advantages Commercial banking can help your business by making it easier to manage day-to-day financial tasks. An established commercial account with a bank will make it easier to borrow money when you grow your business. Often you are assigned a representative who works directly with the company to find the best services and solutions for the issues the business is facing. For example, the company may save money by outsourcing payroll processing. Banks also offer invoicing services, with personalized invoices, and can set up transfers to other banks which will simplify accounting procedures. Some banks offer retirement account management for your employees as well as other employee benefits. This can save you money, and make it easier to manage all of the services you offer employees. Your bank also may offer you discounts on your merchant services fees. Commercial banking allows you to set up direct deposits for your employees as well as for any invoices you need to pay to others, which will save you time. Disadvantages Commercial banking or business accounts are often more expensive than traditional bank accounts. Banks may charge fees for night deposits, for processing a certain number of checks and for the payroll services. Depending on the size of your business, some of the services offered may not be needed, and you may still be charged for the services even if you're not fully using them. Different banks may offer different services and charge different fees, and it can be difficult to compare the services. Signing up for a commercial account before your business is ready for one will cost you and may slow the growth of the business. If you choose the wrong bank, you may have a difficult time opening a new account and transferring all of the services to another bank. This can cost you both time and money. Present Scenario Presently, there are two forms of banks operating in Bangladesh, namely, Schedule Banks and Non-schedule banks. Banks operating under Bank Company Act, 1991 are categorized under Schedule Banks. State- owned commercial banks, private commercial banks, Islamic commercial banks, foreign commercial banks fall under this category. Banks established for distinct and specific objective and fall under non-schedule banks. They do not hold as much power as the schedule banks since they do not have all the functions present in schedule banks. Grameen Bank, Probashi Kallyan Bank, Karmasangsthan Bank, Progoti Co-operative Land Development Bank Limited (Progoti Bank) and Ansar VDP Unnayan Bank fall under this category. There are some Islamic Banks in operation as well six of which operate under Private Commercial Banks and ten conventional banks partially operate in this manner. The commercial banks play a pivotal role in shaping Bangladesh’s economy through its contributions. Promotion of capital formation, investment opportunities in new ventures, promotion of trade and industry, agricultural development, promotion of economic activity, implementation of monetary policy, are some of the significant portrayals of commercial banks. In regards to establishment of banks in rural areas, much progress has not been made. As of 2012, there was a decrease from 57.94 percent to 57.20 percent of bank branches in rural areas. However, the percentage of banks in urban areas witnessed increases. The problem associated with banking sector is widespread and is not constricted to banking system only. The independence and accountability of the regulatory body is still questionable and therefore calls for drastic improvement. As of June 2017, reports suggest, Tk20 Billion (US$250M) were allocated by the government to recapitalize Bangladesh state-owned banks as there have been problems resurfacing regarding regulators’ inefficiency to fix various related issues. Limited actions have been undertaken to penalize defaulters, improve risk management and strengthen bank management. In its latest Article IV report, the IMF has highlighted some underlying risks to the banking sector due to surplus liquidity. However, an improvement in conditions within the state-owned banking sector is dependent on government’s political will to focus on problems, which has been limited till date. However, if the aforementioned problems are addressed and tackled well, new opportunities from the banking sector can arise. Acceleration of expansion due to a high number of population, ability to meet global standards in terms of product quality, prospects for new global banks to start operation in Bangladesh, opportunity for the banking sector to become a major contributor in the national economy are some of the benefits that can be reaped, if opportunities are reaped strategically and problems handled tactfully. Savings & Loans Association Definition A savings and loan association (S&L), or thrift institution, is a financial institution that specializes in accepting savings, deposits, and making mortgage and other loans. The terms "S&L" or "thrift" are mainly used in the United States; similar institutions in the United Kingdom, Ireland and some Commonwealth countries include building societies and trustee savings banks. They are often mutuallyheld (often called mutual savings banks), meaning that the depositors and borrowers are members with voting rights, and have the ability to direct the financial and managerial goals of the organization like the members of a credit union or the policyholders of a mutual insurance company. While it is possible for an S&L to be a joint-stock company, and even publicly traded; in such instances it is no longer truly a mutual association, and depositors and borrowers no longer have membership rights and managerial control. By law, thrifts can have no more than 20 percent of their lending in commercial loans — their focus on mortgage and consumer loans makes them particularly vulnerable to housing downturns such as the deep one the U.S. has experienced since 2007. Early history At the beginning of the 19th century, banking was still something only done by those who had assets or wealth that needed safekeeping. The first savings bank in the United States, the Philadelphia Saving Fund Society, was established on December 20, 1816, and by the 1830s such institutions had become widespread. In the United Kingdom, the first savings bank was founded in 1810 by the Reverend Henry Duncan, Doctor of Divinity, the minister of Ruthwell Church in Dumfriesshire, Scotland. It is home to the Savings Bank Museum, in which there are records relating to the history of the savings bank movement in the United Kingdom, as well as family memorabilia relating to Henry Duncan and other prominent people of the surrounding area. However the main type of institution similar to U.S. savings and loan associations in the United Kingdom is not the savings bank, but the building society and had existed since the 1770s. Further Advantages Savings and loans were given a certain amount of preferential treatment by the Federal Reserve inasmuch as they were given the ability to pay higher interest rates on savings deposits compared to a regular commercial bank. This was known as Regulation Q (The Interest Rate Adjustment Act of 1966) and gave the S&Ls 50 basis points above what banks could offer. The idea was that with marginally higher savings rates, savings and loans would attract more deposits that would allow them to continue to write more mortgage loans, which would keep the mortgage market liquid, and funds would always be available to potential borrowers. However, savings and loans were not allowed to offer checking accounts until the late 1970s. This reduced the attractiveness of savings and loans to consumers, since it required consumers to hold accounts across multiple institutions in order to have access to both checking privileges and competitive savings rates. In the 1980s the situation changed. The United States Congress granted all thrifts in 1980, including savings and loan associations, the power to make consumer and commercial loans and to issue transaction accounts. The Depository Institutions Deregulation and Monetary Control Act (DIDMCA) of 1980 was designed to help the banking industry to combat disintermediation of funds to higher-yielding non-deposit products such as money market mutual funds. It also allowed thrifts to make consumer loans up to 20 percent of their assets, issue credit cards, and provide negotiable order of withdrawal (NOW) accounts to consumers and nonprofit organizations. Over the next several years, this was followed by provisions that allowed banks and thrifts to offer a wide variety of new market-rate deposit products. For S&Ls, this deregulation of one side of the balance sheet essentially led to more inherent interest rate risk inasmuch as they were funding long-term, fixed-rate mortgage loans with volatile shorter-term deposits. In 1982, the Garn-St. Germain Depository Institutions Act was passed and increased the proportion of assets that thrifts could hold in consumer and commercial real estate loans and allowed thrifts to invest 5 percent of their assets in commercial, corporate, business, or agricultural loans until January 1, 1984, when this percentage increased to 10 percent. Disadvantages a. Imposes heavy penalty and legal action in case of default of loan b. Charges high rate of interest, if the party fails to pay the loan amount in the allotted time c. Adds extra burden on the borrower, who needs to incur cost in preparing legal documents for procuring loans d. Affects the goodwill of the organization, in case of delay in payment. Characteristics The most important purpose of savings and loan associations is to make mortgage loans on residential property. These organizations, which also are known as savings associations, building and loan associations, cooperative banks (in New England), and homestead associations (in Louisiana), are the primary source of financial assistance to a large segment of American homeowners. As home-financing institutions, they give primary attention to single-family residences and are equipped to make loans in this area. Some of the most important characteristics of a savings and loan association are: 1. It is generally a locally owned and privately managed home financing institution. 2. It receives individuals' savings and uses these funds to make long-term amortized loans to home purchasers. 3. It makes loans for the construction, purchase, repair, or refinancing of houses. 4. It is state or federally chartered. Differences from savings banks Accounts at savings banks were insured by the FDIC. When the Western Savings Bank of Philadelphia failed in 1982, it was the FDIC that arranged its absorption into the Philadelphia Savings Fund Society (PSFS). Savings banks were limited by law to only offer savings accounts and to make their income from mortgages and student loans. Savings banks could pay one-third of 1% higher interest on savings than could a commercial bank. PSFS circumvented this by offering "payment order" accounts which functioned as checking accounts and were processed through the Fidelity Bank of Pennsylvania. The rules were loosened so that savings banks could offer automobile loans, credit cards, and actual checking accounts. In time PSFS became a full commercial bank. Accounts at savings and loans were insured by the FSLIC. Some savings and loans did become savings banks, such as First Federal Savings Bank of Pontiac in Michigan. What gave away their heritage was their accounts continued to be insured by the FSLIC. Savings and loans accepted deposits and used those deposits, along with other capital that was in their possession, to make loans. What was revolutionary was that the management of the savings and loan was determined by those that held deposits and in some instances had loans. The amount of influence in the management of the organization was determined based on the amount on deposit with the institution. The overriding goal of the savings and loan association was to encourage savings and investment by common people and to give them access to a financial intermediary that otherwise had not been open to them in the past. The savings and loan was also there to provide loans for the purchase of large ticket items, usually homes, for worthy and responsible borrowers. The early savings and loans were in the business of "neighbors helping neighbors". Cash Credit: Cash credit can be defined as an arrangement made by the bank for the clients to withdraw cash exceeding their account limit. The cash credit facility is generally sanctioned for one year but it may extend up to three years in some cases. In case of special request by the client, the time limit can be further extended by the bank. The extension of the allotted time depends on the consent of the bank and past performance of the client. The rate of interest charged by the bank on cash credit depends on the time duration for which the cash has been withdrawn and the amount of cash. The advantages of the cash credit are as follows: a. Involves very less time in the approval of credit b. Involves flexibility as the cash credit can be extended for more time to fulfill the need of the customers. c. Helps in fulfilling the current liabilities of the organization d. Charges interest only on the amount withdrawn by the customer. The interest on cash credit is charged only on the amount of cash withdrawn from the bank, not on the total amount of credit sanctioned. The cash credit is one of the most important instruments of short-term financing but it has some limitations. These limitations are mentioned in the following points: a. Requires more security for the approval of cash b. Imposes very high rate of interest c. Depends on the consent of the bank to extend the credit amount and the time limit Bank Overdraft: Bank overdraft is the quickest means of the short-term financing provided by the bank. It is a facility in which the bank allows the current account holders to overdraw their current accounts by a specified limit. The clients generally avail the bank overdraft facility to meet urgent and emergency requirements. Bank overdraft is the most popular form of borrowing and do not require any written formalities. The bank charges very low rate of interest on bank overdraft up to a certain time. The advantages of the bank overdraft are as follows: a. Involves no documentation for the extension of overdraft amount b. Imposes nominal interest on the overdraft amount c. Charges fee only on the amount exceeding the account limit The disadvantages of the bank overdraft are as follows: a. Incurs high cost for the clients, if they fail to pay the amount of overdraft for a longer period of time b. Hampers the reputation of the organization, if it fails to pay the amount of overdraft on time c. Allows the bank to deduct overdraft amount from the customers’ accounts without their permission Discounting of Bill: Discounting of bill is a process of settling the bill of exchange by the bank at a value less than the face value before maturity date. According to Sec. 126 of Negotiable Instruments, “a bill of exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at fixed or determinable future time a sum certain in money to order or to bearer.” The facility of discounting of bill is used by the organizations to meet their immediate need of cash for settling down current liabilities. Conditions laid down by the bank for discounting of bill are as follows: a. Must be intended to specific purpose b. Must be enclosed with the signature of the two persons (company, bank or reputed person) c. Must be less than the face value d. Must be produced before the maturity period.